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Different Types of Mortgages

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Mortgages generally come in two main types: fixed-rate, which locks your interest rate for a set period, and variable-rate, which fluctuates based on economic conditions.

This guide explains how each type of mortgage works and provides expert advice on various mortgage options.

It includes information tailored for first time buyers and those aged 50+ looking for a mortgage, who may face challenges in obtaining a standard mortgage.

Popular Types of Mortgages

Fixed Rate Mortgages

Fixed-rate mortgages are the most common type of product taken out by first time buyers and homeowners remortgaging.

With a fixed-rate mortgage, you’ll pay the same interest rate for a set number of years, meaning your monthly repayments will remain consistent regardless of what happens to the Bank of England base rate.

Common fixed periods are two, three, five, seven, ten, and fifteen years. At the end of your fixed term, you’ll need to remortgage. If you don’t, you’ll be moved to your lender’s standard variable rate (SVR), which is typically much more expensive.

Tracker Mortgages

Tracker mortgages follow the Bank of England base rate plus a set percentage. This set percentage is usually set by the mortgage lender.

For instance, if the base rate is 5.25% and your tracker is ‘base rate plus 1%’, your rate will be 6.25%. If the base rate rises, your payments increase, and if it falls, your payments decrease—unless the mortgage has a ‘collar’ limiting how low the rate can go.

Trackers typically have an introductory period (commonly two years), after which you’ll revert to the lender’s more expensive standard variable rate (SVR) if you don’t remortgage.

Discount Mortgages

Discount mortgages are variable-rate loans that offer a discount off your lender’s standard variable rate (SVR). For example, if the SVR is 5% and your mortgage has a discount of 2%, you’ll pay an interest rate of 3%.

If the lender increases its SVR, your payments will rise, and if the SVR decreases, your payments will drop. These mortgages typically come with an introductory period of around two years.

Standard-Variable-Rate (SVR) Mortgages

Each lender sets its own standard variable rate (SVR), which is typically higher than the rates for fixed, tracker, or discount mortgages.

While SVRs are not directly tied to the Bank of England base rate, they are influenced by it.

For example, if the base rate rises by 0.25%, lenders may choose to increase their SVR by a similar amount, although they are not required to do so. SVRs tend to remain more stable and don’t change frequently.

Which type of mortgage is better?

Choosing between a fixed rate and a variable rate mortgage depends on your mortgage goals. A fixed-rate mortgage offers stable, manageable payments, making it ideal for those who want the same outgoings every month or those who plan to stay in their home long-term.

In contrast, a variable-rate mortgage provides potentially lower initial payments and the possibility of savings if interest rates decrease. However, this comes with the risk of fluctuating rates and higher payments if rates rise.

Your decision should consider current interest rate trends, economic conditions, and how long you plan to stay in the home. This is something your mortgage advisor will cover with you when taking out a new mortgage product.

Other Types of Mortgages

Interest Only and Repayment Mortgages

When you take out a mortgage, it will either be on an interest only or a repayment basis.

With an interest only mortgage, you pay only the interest each month, meaning you must pay off the entire loan principal at the end of the mortgage term.

With a repayment mortgage, which is far more common, your monthly payments include both interest and a portion of the loan, gradually reducing the total amount owed over time.

Joint Mortgages

When you buy a property with another person, such as a partner, friend, or family member, you’ll take out a joint mortgage.

Both parties will be named on the mortgage agreement and property deeds, making them jointly responsible for making payments.

Offset Mortgages

Offset mortgages link your savings and current account to your mortgage account, this allows you to reduce the amount of interest you pay.

Instead of earning interest on your savings, the balance in your savings and current accounts is subtracted from your mortgage balance when calculating interest charges.

This can significantly lower the interest you owe and help you pay off your mortgage faster. Offset mortgages offer flexibility, as you can access your savings if needed, while still benefiting from reduced mortgage interest.

Guarantor Mortgages

Guarantor mortgages are where a third party, often a parent or close relative, agrees to be responsible for the mortgage repayments if the primary borrower is unable to meet them.

This can help individuals who might not qualify for a mortgage on their own, such as those trying to get a mortgage with bad credit, get accepted.

The guarantor’s income and assets are considered in the application process, which can increase the amount the borrower can access.

While it provides an opportunity for homeownership, it also places significant financial responsibility on the guarantor, who must be prepared to cover repayments if necessary.

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About the Author

Malcolm Davidson

Managing Director of UK Moneyman LTD

Malcolm is one of the UK’s most well-known and respected Mortgage Advisors. He is passionate about providing a 5* customer experience and he has also trained and mentored dozens of fellow Advisors in a career that is now in its third decade.

In addition to his day to day duties as Managing Director, Malcolm still gives out mortgage advice and feels lucky that his job is also very much his hobby.

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